2013 Wrap-Up and Invitation to Vote on Your Favorite
Article
by the Curmudgeon and Victor Sperandeo
Introduction:
We
hope readers have enjoyed the original themes and commentary in our CURMUDGEON
articles this year. Victor and I
meticulously research the topics we agree to write about and then augment our
remarks with quotes from seasoned financial professionals to support our
position(s).
There
were quite a few important subjects we wrote about in 2013, including:
-Much
more leverage in the market & more concentrated control among fewer players
-U.S.
Equity and Gold markets might be manipulated by the Fed and/or its Primary
Dealer/owner banks
-What
is Gold and Where Gold is now in the investment cycle
-The
great disconnect between ever rising U.S. stock prices and a stagnating economy
is wider than ever (see bar chart below for a wake-up call)
-The
U.S. is exhibiting many of the attributes of a socialist country
-Is
the Fed a Ponzi scheme or a no-risk hedge fund
-Fannie
Mae and Freddie Mac accounting appear to be another U.S. Ponzi scheme
-And
many more..............................................
We invite readers to
vote for their favorite Curmudgeon article and let us know what topics they'd
like to see addressed in 2014.
Email the CURMUDGEON
at: ajwdct@sbumail.com
What to Watch for in
2014:
As
you might expect, our thinking for next year (we don't make market forecasts or
price/time predictions) is quite different from the mainstream media. For example, it's quite likely that the
economy- particularly housing- will slow due to less QE. As a result, new Fed Chief Janet Yellen might
be forced to abort tapering and increase QE.
Also,
we think the U.S. $ will hold the key to many investment markets next year,
e.g. gold, oil, bonds, and stocks.
That's especially true if it breaks down or falls sharply. Victor thinks the global trend towards
socialism is a major problem (see his comments below).
The
Curmudgeon believes the greatest global financial threat is unchecked global
bank lending and nation-states' failure to co-ordinate monetary policies. This is especially true in China, where state
owned banks make loans to entities/well connected individuals who then loan
that money out at much higher rates. A terrific
article on that topic appeared in this Saturday's NY Times.
"Official
bank lending has more than doubled since the global financial crisis, growing
nearly twice as fast as the overall economy. The even bigger problem, however,
appears to come from the rise of a shadow banking system that has allowed a
number of companies and individuals, often with political connections, to
borrow from state-controlled banks at low interest rates and relend the money
at much higher rates to private businesses desperate for credit at almost any
price."
In
his December 19th NY Times op-ed Stumbling
Toward the Next Crash, former UK Prime Minister Gordon Brown made
several eye opening statements regarding China's credit expansion and global
debt build-up to seemingly unsustainable levels:
"China’s
total domestic credit has more than doubled to $23 trillion, from $9 trillion
in 2008 — as big an increase as if it had added the entire United States
commercial banking sector. Borrowing has risen as a share of China’s national
income to more than 200 percent, from 135 percent in 2008. China’s growth of
credit is now faster than Japan’s before 1990 and America’s before 2008, with
half that growth in the shadow-banking sector. According to Morgan Stanley,
corporate debt in China is now equal to the country’s annual income."
"Emerging-market
economies in Asia and Latin America have seen a 20 percent growth in their
shadow-banking sectors. After 2009, Asian banks expanded their balance sheets
three times faster than the largest global financial institutions, while adding
only half as much capital."
Follow-Up on Market
Manipulation:
After
reading our piece on stock market manipulation following the Fed's recent
announcement to begin tapering, Tim Quast of ModernIR
wrote in an email to the CURMUDGEON:
"There’s
no question that machine-driven behavior is behind the big market gains.
Whether the Fed is intentionally driving it is impossible to substantiate.
We
track volumes through nearly all primary dealers – the firms required to make
markets at Treasury auctions of notes, bills and bonds. Following the Japan Tsunami in 2011, we saw
coordinated intervention in markets by the biggest banks, a willful effort to
stabilize global financial markets.
That’s injecting liquidity.
Here
lately? It is hard to say. We can see the behaviors setting price. Bottom-up investors were not and are not now
the price-setters. It’s all speculative
trading and index/ETF volumes that coincided with options-expirations 12/18-20
and index-rebalances 12/20.
If
there’s an argument to be made that the Fed intervened and managed outcomes,
it’s in the US dollar. Leading into the
Fed's tapering decision, the dollar was weakening, suggesting the Fed may have
been injecting dollars into the system to purposely weaken the dollar ahead of
tapering, so that any rise in the dollar resulting from lessening liquidity
would be blunted.
Meanwhile,
the S&P 500 has been soaring as the dollar remains steady – that’s
inflation resulting from the injection of dollars. I’m sure the Fed is as surprised as anyone by
how the equity market is soaring. For
sure, it’s not at all what they (the Fed) expected."
Victor's Closing
Comments:
All
investments (and life decisions) are about "risk versus reward." Without such a thought processing
evaluation, you will lose more money than you gain. This maxim is especially relevant for
today's U.S. stock market.
Although
a market can still appreciate in a high risk environment, lowering your
exposure is a critical consideration for maximum returns when the risk
ultimately manifests itself in a sharp price decline.
The
chart below clearly show that after a 4.75 year bull market (which started
3/9/09), bullish sentiment is clearly excessive.
Greed
has overcome fear. In my authored books and interviews, I stressed a minimum of
1:3 risk vs reward ratio in order to justify an investment. For example, if you think the market can have
a 10% correction, you need a 30% potential upside. That's not very likely in
today's U.S. equity market, especially after the unchecked advance since the
last 10% correction ended on October 4, 2011.
While shorting stocks is a "very deadly sport' these days, being
long about 1/3 of your normal stock allocation is prudent.
The
beginning of tapering cannot be bullish in the long run; as printing money to
buy debt is the reason the Fed uses this "tool" to create what it
believes to be the "wealth effect."
But it has not worked, as evidenced by sluggish GDP growth, miniscule
commercial loans, and still high unemployment.
And that's after 4 1/2 years of the U.S. "economic recovery."
Overall,
my main concerns are the U.S. dollar's fall or collapse and the world’s trend
towards Socialism. Austerity - higher
taxes and lower government spending - is what I refer to as "Socialism
Lite."
With
this backdrop, how will the world economy really grow? Not via austerity measures or huge government
deficits. Huge amounts of debt lead to
defaults and/or hyperinflation. So the
U.S. and Japan have resorted to printing money, while Europe stands ready to do
likewise.
With
few exceptions, governments around the globe really don't care about negative
consequences of their current fiscal/monetary policies (or lack of same), as
long as it’s a "future problem" - not today's problem. In my opinion, this is most immoral political
philosophy in history.
My
only optimistic note is that ObamaCare is so bad, and (adversely) effects so
many people, it will change the perception of big government being good for the
people.
Till next year........................
The Curmudgeon
ajwdct@sbumail.com
Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo
is a historian, economist and financial innovator who has re-invented
himself and the companies he's owned (since 1979) to profit in the ever
changing and arcane world of markets, economies and government policies.
As President and CEO of Alpha Financial Technologies LLC, Sperandeo overseas
the firm's research and development platform, which is used to create
innovative solutions for different futures markets, risk parameters and other
factors.